Overview
FAR Subpart 31.1 establishes the framework for applying cost principles and procedures to various types of contracts, subcontracts, and modifications. It ensures uniformity by categorizing regulations based on organizational type—such as commercial concerns, educational institutions, and state/local governments—while providing the mechanism for "advance agreements" to clarify the treatment of specific costs before they are incurred.
Key Rules
- Organizational Categorization: Cost principles are applied based on the entity type:
- Commercial Organizations: Governed by Subpart 31.2.
- Educational Institutions: Governed by Subpart 31.3 (referencing OMB Uniform Guidance).
- State, Local, and Tribal Governments: Governed by Subpart 31.6.
- Nonprofit Organizations: Governed by Subpart 31.7.
- Fixed-Price Contracts: While Part 31 is mandatory for cost-reimbursement contracts, it also applies to fixed-price contracts whenever cost analysis is performed or a clause requires cost determination. However, the ultimate goal remains a "fair and reasonable" total price, rather than agreement on every individual cost element.
- Construction & Architect-Engineer (A&E) Nuances: These follow Subpart 31.2 but have specific rules for construction equipment ownership and operating costs. Actual cost data is preferred, but predetermined schedules (e.g., U.S. Army Corps of Engineers) may be used if adjusted for unallowable factors like replacement costs or interest.
- Advance Agreements: These are written agreements used to determine the treatement of special or unusual costs (e.g., pre-contract costs, travel, or compensation). They cannot be used to make a cost "allowable" if it is expressly "unallowable" under the FAR.
- Deviations: Individual deviations require approval by the agency head; class deviations for civilian agencies require approval from the Civilian Agency Acquisition Council (CAAC).
Responsibilities
- Contracting Officer (CO): Responsible for incorporating correct cost principles by reference in contracts and negotiating advance agreements for specific contracts or single-office classes.
- Administrative Contracting Officer (ACO): Responsible for negotiating broad advance agreements that apply to multiple contracts or agencies and coordinating with the CO and audit agencies.
- Agency Heads/Designees: Responsible for approving individual deviations from cost principles.
- Government Negotiator: Must check for unliquidated dollar balances across other agencies and invite relevant audit agencies (e.g., DCAA) to participate in negotiations for advance agreements.
- Contractors: Responsible for identifying costs that require advance agreement, maintaining accounting records for equipment costs, and certifying indirect cost rate proposals to avoid penalties.
Practical Implications
- Dispute Avoidance: For contractors, the use of Advance Agreements (31.109) is a critical risk-management tool. Negotiating the treatment of "gray area" costs like independent R&D or relocation expenses before they are incurred prevents the government from disallowing those costs years later during an audit.
- Construction Equipment Management: Firms in the construction sector must be careful not to "double-dip." If they use a predetermined rate schedule for equipment ownership, they must ensure those costs are removed from their indirect cost pools (overhead).
- Pricing Modifications: Even on a Firm-Fixed-Price contract, if a change order is issued that requires cost analysis, the contractor must be prepared to justify their proposal using the Part 31 cost principles.
- Penalty Risk: Under 31.110, contractors face significant financial penalties if they include expressly unallowable costs in their final indirect cost settlement proposals, making a rigorous internal review of "Subpart 31.2" compliance essential.